Next step for sustainability reporting: Assurance requirements

International standards for corporate reporting on sustainability are rapidly under development.

New standards for assuring sustainability reporting won't be far behind.

The International Auditing and Assurance Standards Board (IAASB) said it will develop standards for assurance on sustainability reporting that will give financial statement users confidence that the sustainability information reported is reliable and credible.

The IAASB announced the commitment in its response to the exposure drafts of standards for sustainability- and climate-related disclosures developed and published for comment by the newly formed International Sustainability Standards Board (ISSB) of the IFRS Foundation.

"The reliability and quality of sustainability reporting and supporting investors' and regulators' trust in the sustainability information hinge on the effectiveness of the external reporting supply chain," IAASB Chair Tom Seidenstein said in a news release.

He added: "As in financial reporting, external assurance has a key role in contributing to reporting reliability and investor confidence. This is why the IAASB's feedback focuses on the ability of practitioners to obtain assurance on an entity's sustainability reporting prepared in accordance with the ISSB draft standards, and why we're committed to collaborating with and supporting the ISSB."

The IAASB's response emphasised the possible value of cooperation between the IAASB and ISSB, as well as with the International Ethics Standards Board for Accountants, to strengthen the connectivity among sustainability reporting, external sustainability assurance, and ethical standards — especially as reporting standards become increasingly refined and enhanced.

The IAASB's comment letter said: "Assurability, in the context of reporting standards, means whether they are designed in a manner that results in sustainability information on which an assurance engagement can be performed."

In the letter, the IAASB also identified several themes relating to the assurability of an organisation's sustainability information prepared in accordance with the IFRS Sustainability Standards. The IAASB said:

• There were certain areas where further requirements and guidance would support enhanced disclosures by the entity.

• As proposed, certain matters in IFRS S1, General Requirements for Disclosure of Sustainability-Related Financial Information, and IFRS S2, Climate-Related Disclosures, may create uncertainty or confusion about what is required or what needs to be applied and how the requirement(s) should be carried out.

• The proposals lack clarity about the meaning, scope, or application of certain key concepts, which may, in addition to other challenges, create a completeness challenge for the assurance practitioner.

• The clarity of requirements and descriptions could be improved for some items in order to enhance understanding and consistency of application.

The comment letter also detailed areas that may give rise to assurance challenges. The IAASB said:

• Multiple levels of criteria are likely to be used in the recognition, measurement, presentation, and disclosure of sustainability information, and the entity should disclose the criteria used as the basis of the information.
• Clarification is needed on the objectives of the standards and the meaning of sustainability-related risks and opportunities in the context of IFRS S1 and the climate-related risks and opportunities in the context of IFRS S2.
• The relationship between IFRS S1 and other IFRS sustainability standards could be more directly and prominently addressed.
• It may take time for companies to fully apply the IFRS sustainability standards, therefore it would be important for the ISSB to require transparency about the limitations of these disclosures.
• Further guidance should be developed to enhance consistency in applying the concept of materiality in preparing sustainability information.
• More guidance is needed on consolidation of parent and investee information and how to aggregate or disaggregate this information.
• Clarification should be provided on the definition of the value chain, and the IAASB recommended that entities should explain how the value chain has been identified and scoped.
• Guidance should indicate what time horizons might be appropriate for each industry.
• The clarity and understandability of resilience disclosure requirements should be improved.
• Cross-references should be restricted to limited circumstances or types of information.
• The restatement of comparatives should be limited to particular circumstances.
• It may be more appropriate to require connectivity as an overarching principle that underpins the preparation of sustainability-related financial information, supported by guidance and examples of how connectivity is communicated.

AICPA & CIMA also showed support in a comment letter on IFRS S1 and IFRS S2.

AICPA & CIMA's comment letter on IFRS S1 and IFRS S2 applauds the ISSB's objectives and describes the exposure drafts as "consistent with how preparers already organise financial statement information".

The comment letter went on to say: "In order to be assurable, the standards used to report sustainability-related financial information must have the characteristics of suitable criteria, including being objective, measurable, complete, and relevant. ISSB should confer with IAASB to ensure that standards can be used as suitable criteria."

— To comment on this article or to suggest an idea for another article, contact Kevin Brewer at Kevin.Brewer@aicpa-cima.com.